Newsletter Date
August 2010
‘eBay entrepreneurs’ in ATO sights
The Tax Office has successfully obtained records from eBay and
The Trading Post that will enable them to data match income
declared by taxpayers to their income generated online.
Targeting those with earnings of $20,000 or more in any of the
last three financial years, the ATO crackdown is looking for
online operators who are effectively running a business but not
declaring the income. The Tax Office also expects to catch
existing businesses that are generating additional income
through the trading sites but not declaring or understating the
income.
The Tax Office will match data from the trading sites to Tax File
Numbers, ABNs, addresses and dates of birth. The data
matching program identifies a list of taxpayers ‘of interest’ to the
Tax Office who are then contacted for review or audit.
For many, sites like eBay offer a distribution channel for home or
start up businesses without the expense of a shop front or
developing a retail network where margins can be squeezed and
profits reduced. It’s a way of ‘dipping your toe’ in the retail
market to gauge a product lines appeal without many of the
overhead costs associated with traditional business. The Tax
Office focus means that they suspect there are a host of eBay
business entrepreneurs who are not declaring income earned.
So, at what point do you have to declare income you have
earned to the Tax Office? The Tax Office will be looking to see if
your activity online could be deemed to be a business. There is
no one test for what qualifies you as a business versus a hobby
but factors such as the regularity of your transactions, whether or
not you are promoting yourself as business (developing a brand
name etc), if you engage in marketing activities, whether you
intend to develop a business and make a profit (or have the
capacity to generate a profit over time), the size, scale and
permanency of your activities, and whether you operate in a
business-like manner, all go toward determining whether what
you are doing is a business or merely a hobby. If your activities
are just a hobby then the income is not assessable, and the
expenses are not deductible. If you are a business then you
need to declare the income earned but you also get to claim
deductions for the cost of the business activities.
If you think you might be affected by the ATO’s data matching
program, contact us today. The ATO is offering reduced
penalties to taxpayers who voluntarily disclose income earned
from the online trading sites.
Don’t let your share structure trip you up
Many companies have different classes of shares but when it
comes time to sell; this share structure might be an impediment.
There are a number of reasons why
differential share structures are used - the
ability to provide different rights to equity
holders and allowing dividends to be paid
to one class of shareholder in preference
to another are common reasons. Much of
this comes down to the way the company
is managed and the arrangements
between shareholders. Having different
share classes can provide an additional
level of flexibility in the ownership of a
company.
There is however one occasion where
different share classes can work against
you; when the company sells capital
assets, triggers a capital gain and wants to
reduce that capital gain by accessing the
small business CGT concessions. The
most common example of this is the sale
of the business or shares in the company.
The concessions are attractive because
they can defer capital gains tax or reduce
it to zero.
To access a number of the small business
CGT concessions you need to be a
significant individual, as defined by the
legislation. This is a person who holds at
least a 20% participation interest in the
company. Such an interest requires them
to have rights to dividends, return of
capital, and voting rights. So, what is the
problem with different share classes?
Let’s assume we have a company with
three shareholders. Each shareholder has
one ordinary share. Also on issue is one A
class share, one B class share, and one C
class share. These shares have the same
rights attaching to them. The different
shareholders each hold a different class of
share in addition to the ordinary share they
own. This structure was put in place to
allow dividends to be paid to the
shareholders at different times. The
directors have the right to declare
dividends to any class of share. Over the
years the company has declared dividends
but only to the ordinary shares. They have
never used the different share classes for
dividend purposes. Now, the company
Page - 1 - The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you
should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained
Newsletter Date
August 2010
sells its business and wants to manage the capital gain by using
the small business CGT concessions. The preferred concession
they want to access is the small business retirement concession.
This concession requires there to be a significant individual.
Unfortunately, none of the shareholders qualify. Because the
company could pay a dividend to any of the classes of shares
and no one shareholder holds at least a 20% interest in all
classes of shares on issue, a significant individual does not exist.
The fact that the company has never paid dividends to one share
class in preference to another does not matter. The mere ability
to do this fails the significant individual test.
This test is applied at the time of the CGT event. So, even where
there are different share classes on issue it may be possible to
overcome this problem. Don’t simply rush out and issue shares
though, as this could trigger other CGT problems. This is
something that needs to be considered and planned well in
advance of a CGT event.
Failing to have a significant individual does not mean you lose
access to all of the small business CGT concessions. It does
however limit the concessions that are available to you.
Why your June BAS is an audit trigger
Most businesses will be finalising their June BAS at the moment.
Extra care needs to be taken with this BAS to ensure that you
have everything correctly recorded for the year. Increasingly, the
ATO are matching data provided in your income tax return with
the total of information returned in your business activity
statements over the same year. Where they find material
differences in the key numbers these differences can trigger an
audit. Final revenue figures and inter-entity charges are key risk
areas. Decisions about these charges and reconciled numbers
should have been made by June 30. You don’t have the luxury
to wait until you finalise your tax return for the year. When you
lodge your June BAS you have provided the ATO with a
summary of your business income and expenses for the year.
Make sure that your combined BAS for the year reconcile to your
financial statements.
Ind
ivi
du
als
 D
e
t
ails of employee share schemes
 Executive salaries and access to
executive perks
 Lifestyles that don’t match income
declared
 Claims for home office expenses
 Claims for business travel (particularly
mistaken claims for travel between the
office and home).
Investors
 Claims for rental and share investment
expenses not entitled to or can’t be
substantiated
 Breach of superannuation caps
Business
 International transactions - Project
Wikenby is credited with reducing the
flow of cash to international tax havens
- Vanuatu, Switzerland, Lichtenstein –
by 20 to 30%!
 Transfer pricing issues
 High level of GST credits
Quote of the month
“An election is coming. Universal
peace is declared, and the foxes have
a sincere interest in prolonging the
lives of the poultry.” George Eliot
Who is on this year’s tax hit list?
The ATO are fairly up front. Every year they tell you what they
are targeting and why. That’s why when the Tax Commissioner
released his compliance program for 2010/2011; we took a keen
interest in what he had to say.
The way the tax office catch tax evasion is more sophisticated
and far reaching than ever. Last year, they utilised over 500
million transaction records from third parties. That is, bank
details, international transactions, investments, welfare data,
super fund information, luxury car and boat purchases, employee
share scheme details, property data, are all used to make sure
that the income you declare on your tax return is an honest
assessment.
Page - 2 – The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you
should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained